Andy Kroll

Senior Reporter

Andy Kroll is Mother Jones' Dark Money reporter. He is based in the DC bureau. His work has also appeared at the Wall Street Journal, the Guardian, Men's Journal,the American Prospect, and TomDispatch.com, where he's an associate editor. Email him at akroll (at) motherjones (dot) com. He tweets at @AndyKroll.

It may not look like good news, but if you're an American taxpayer, pay attention. AIG, the massive global insurer and beneficiary of billions of dollars in taxpayer cash, is eyeing a lawsuit against Goldman Sachs, a move clearly piggybacking on the Securities and Exchange Commission's announcement that it was suing Goldman for allegedly misleading its clients. The SEC's suit, filed on Friday, says Goldman created and sold a complex financial product called a collateralized debt obligation (CDO), whose value depended on the health of the subprime mortgage market, and that Goldman let a hedge fund trader wanting to bet against the housing bubble, John Paulson, pick basement-quality bonds to make up that CDO. More importantly, Goldman, the SEC alleges, failed to tell the buyers of that CDO that Paulson picked those bonds and that he was betting against those bonds and the housing market.

AIG's potential suit, the Financial Timesreports, would center on "losses incurred on USD 6 billion of insurance deals on mortgage-backed securities similar to one that led to fraud charges against the US bank." In other words, AIG sold insurance against the failure of the Goldman bonds in question, from a family of bonds called Abacus. When those bonds inevitably failed, AIG had to pay out, recording losses of $2 billion. But now knowing that crucial information about the strength of those bonds was allegedly left out, AIG could have a case to make.

The insurer, you'll remember, is a company largely buoyed by the American taxpayer—something to the tune of $134 billion, including the Federal Reserve and Treasury's support. Someday, a portion of those funds could make their way back into the government's coffers if and when AIG returns to full health. This suit against Goldman, however, could help AIG recoup some of its losses, which ultimately is a good thing for the American taxpayer that so generously kept a too-big-to-fail AIG from crumbling to the ground.

As the Senate's financial reform effort nears the final stretch, there's no mistaking the Obama administration's stance on regulating derivatives, the complex products that derive their value from underlying prices (the cost of wheat, say, or certain stock's value) and are used to both hedge risk and recklessly bet on the economy. Gary Gensler, chairman of the Commodity Futures Trading Commission which oversees derivatives, wants the opaque, $450 trillion over-the-counter derivatives market dragged fully into the open, so price, volume, and the structure of deals is transparent. Ditto Treasury Secretary Neil Wolin, who has said, "We cannot afford to wait to...bring transparency and oversight to derivatives." And Obama himself said last week he'll veto any bill if it lacks tough derivatives regulation. But is Obama and Co. truly doing all it can to back up all that tough talk on derivatives?

That's what one group, the Interfaith Center on Corporate Responsibility, is essentially asking, on the eve of a vote on a major shareholder resolution set to be voted on today by shareholders of Citigroup. ICCR is calling on the US government to flex its shareholder muscle (at 2010's outset, the US government owned 27 percent of Citi) by voting its shares in support of a resolution, filed by ICCR, calling on Citi's board of directors to report on how the bank uses collateral for its derivatives trading and, more importantly, the bank's position on using their customers' money for derivatives trading.

Such a report would shed plenty of light on the bank's derivatives policies, ICCR says, and would align with the calls for greater transparency from the White House, Treasury, and many lawmakers in Congress. "To adopt an inconsistent posture at this critical juncture on derivatives disclosure would be disastrous," says ICCR executive director Laura Berry, "both in terms of how Wall Street reads the signals from Washington and how seriously Congress sees the Obama administration as being in its support of vital financial services reform."

Unlike most bailed-out banks which have bought back their shares, the US government—and by extension the American taxpayer—still owns a significant chunk of Citi. Granted, the US' ownership in Citi has begun to dwindle, as the Treasury announced plans in March to sell off its stake throughout 2010. Still, nowhere near all of those stocks are sold. If the US government voted in favor of the resolution, it could provide some major heft to the broader calls for greater disclosure and regulation of derivatives.

At the moment, the signs suggest that "yes" vote is unlikely. The Treasury, which orchestrated the bailout, has consistently taken a hands-off stance regarding its stock holdings, and a Treasury spokeswoman, Meg Reilly, told Mother Jones yesterday that the department had no comment. Even in the resolution passes without the US government's help, it'd be a major victory for those trying to bring some sunshine to an insanely lucrative and wholly unregulated corner of our financial markets.

At a Second Amendment rally in the shadow of the Washington Monument, Rep. Paul Broun (R-Ga.) fired up an already boisterous crowd of gun lovers, sign toters, and self-proclaimed Constitutional defenders by railing against his "socialist" colleagues on Capitol Hill and demanding a ballot-box revolution this fall. In doing so, Broun gave the event's organizers—like Skip Coryell, a anti-government gun rights advocate from Michigan—and attending groups like the Oath Keepers just what they wanted to hear.

Echoing a controversial remark made last fall aimed at House Speaker Nancy Pelosi, Broun told the crowd, "We have a lot of domestic enemies in the United States, and they work down the Mall," referring to certain members of Congress. Soon after, Broun added that Second Amendment defenders like himself and those in the crowd—many of them sporting bright orange stickers saying "Guns Save Lives"—needed to protect themselves from "the tyrannical government of the United States" and fight back against the "socialists that are running Congress."

This is not unusual rhetoric for Broun. He has called President Barack Obama a "socialist" and suggested that the administration might use a natural disaster or pandemic to "develop an environment where they can take over." He has also refused to fill in the complete Census form this year, describing it as an invasion of his privacy.

In a brief interview after his speech, I asked Broun whether he, as a politician, agreed with the virulently anti-government rhetoric of the groups hosting the event. For instance, Larry Pratt of Gun Owners for America, one of the march's sponsors, was reported to have said earlier today that "we are in a war." Referring to the government, he added, "They're coming for our freedom, for our money, for our kids, for our property. They're coming for everything because they're a bunch of socialists!" Broun said that he believed "government certainly has a place," but that only "people who are going to fight for limited government, low taxes, low intrusion into people's lives" should be left in office. "It's all about freedom," he said. "The federal government should only be doing the 18 things that Article 1, Section 8 [of the Constitution] gives the authority to do. Just 18."

President Obama struck a tough stance on overhauling Wall Street today, saying he won't accept a financial reform bill if it doesn't include new derivatives regulations, the opaque products that allow certain users to hedge risk but others to gamble on swings in the market. Any new bill needs to bring derivatives trading "under control," the president was quoted as saying by Reuters.

Right now, derivatives, which derive their value from underlying sources like the cost of wheat or interest rates, are mostly traded over the counter, which means there's little public information about trading prices, the structure of the derivatives, and who's trading with whom. The opacity of the OTC derivatives market, worth around $450 trillion, played a major role in the collapse of the global economy. Because Wall Street and other financial heavyweights used derivatives to dangerously bet on the financial markets, and did so without sharing information on the cost and nature of those deals, when those bets went sour in 2008 and 2009, there was no safety net or cushion across the industry to absorb those losses. The result was the crippling of firms like AIG.

New derivatives regulations proposed by the House and Senate would require greater transparency in derivatives trading and would also require that many of the firms buying and selling these products would together bear the brunt of the next crisis, thus preventing a handful of firms from getting pummelled. These are crucial reforms needed to bolster how corporations, utility companies, farmers, and many others use derivatives, and Obama appears ready to make sure those reforms happen.

If politicians needed any more proof that shuffling existing regulators won't fix the fundamental problems, then this week's autopsy of Washington Mutual, the largest bank failure in US history, should suffice. Over several hearings and press briefings this week, the Senate investigations subcommittee, led by Carl Levin (D-MI) and Tom Coburn (R-Okla.), has dissected how WaMu and its former subprime subsidiary, Long Beach Mortgage, created a "mortgage time bomb" and fed the voracious mortgage securitization machine on Wall Street. Moreover, Levin and Coburn's teams examined how WaMu's principal regulator, the Office of Thrift Supervision, utterly failed in every single one of its duties: OTS failed to crack down on the bank's abysmal lending practices; allowed WaMu to churn out bogus option ARM mortgages worth hundreds of billions of dollars; and treated WaMu like a buddy and not a bank to be reined in. Not only that, OTS even blocked another regulator, the FDIC, from trying to get a peek at WaMu's toxic holdings.

The Senate's investigation reads like an exercise in folly. In emails, examiner reports, and other communications, OTS repeatedly spotlighted the bank's pitiful standards and practices. Yet for years the regulator failed to do anything. No enforcement actions, fines, required board resolutions. Nothing. OTS was supposed to be a firefighter, ready to rush into action at the first sign of trouble, Levin told reporters yesterday. Instead, "it stood and watched idly while the incendiary threat grew wider and wider."

Underpinning the OTS' hands-off approach was the bank's cozy relationship with WaMu. As Levin explained, OTS derives its funding from fees it assesses on the banks it regulates; WaMu, it turns out, was a huge source of revenue for OTS, posing a blatant conflict of interest for the regulator. This led to a relationship, emails and reports cited in Levin and Coburn's report show, in which the OTS viewed WaMu not as someone to be scrutinized but as a "constituent" and a customer. "Regulations only work if regulators stay at arm's length from people they regulate," Levin said. OTS, on the other hand, worked "arm in arm" with WaMu.

The evidence dug up by the Senate subcommittee is damning, and it painfully illustrates a classic case of regulatory capture. If anything, it's proof that new financial rules crafted by Congress and the White House need to be regulator-proof; that means limits on risk levels, mandatory amounts of cash to absorb losses, and outright bans on tricky products, among others. Anything else, the Senate's findings suggest, will lead to plenty more OTS-WaMu debacles in the future.